AI Success - Or Lack Of It - Begins To Differentiate Big Tech Stocks

The Magnificent Seven tech stocks are currently reduced to four as Nvidia, Amazon, Meta and Microsoft reap the benefits of their AI initiatives while Google, Apple and Tesla have failed to convince investors that their efforts will bear fruit. 

Google is hampered by perceptions that its wildly profitable search business will be cannibalized by AI chatbots. Apple has suffered because its AI work is considered substandard compared to its competitors and Tesla has been decimated by its luminary owner's bizarre and flighty political behavior, which has inadvertently hurt EV sales while at the same time undermining his claims that it is evolving into an AI company. There are some who believe Google and Apple will eventually figure this out and are strong enough to ride out the current difficulties. Tesla does not yet enjoy that sort of optimism. JL

Roshan Fernandez reports in the Wall Street Journal:

Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla have lorded over the stock market in recent years, linked by the outsize role they share in the economy’s future and the significant slice they comprise in the S&P 500 index. This year, though, shares of Nvidia, Meta and Microsoft have climbed 20% or more, while Apple and Alphabet are down 16% and 2%, respectively. Half of the tech-stock group has reaped the rewards of AI optimism. The chip giant Nvidia has been the clearest winner in the AI race thus far. (But) Apple, Tesla and Alphabet have suffered as Apple failed to woo investors with its AI efforts, Google faces mounting concern that AI chatbots will eat its search business and Tesla has flagged due to falling EV sales and Elon Musk's foray into politics. 

The “Magnificent Seven” stocks are starting to grow apart. 

They are not quite heading to splitsville, but some of the market’s tech heavyweights have made more headway in artificial intelligence—and that has put a strain on their relationship. At least with respect to their recent relative stock performance.

“They are in therapy,” said Dan Morgan, senior portfolio manager at Synovus Trust, of the Magnificent Seven’s diverging paths.

Amazon.com, Alphabet, Apple, Meta Platforms, Microsoft, Nvidia and Tesla have lorded over the stock market in recent years, linked by the outsize role they share in the economy’s future and the significant slice they comprise in the benchmark S&P 500 index.

This year, though, shares of Nvidia, Meta and Microsoft have climbed about 20% or more, while Apple and Alphabet are down 16% and 2%, respectively. Each will soon deliver a quarterly scorecard to investors, with Alphabet and Tesla set to report earnings Wednesday, followed by Meta, Microsoft and Apple the following week.

“It was inevitable. They all can’t run in lockstep forever because they do different things,” said Jamie Cox, managing partner at Harris Financial Group. “Now, the winners and losers stratification is upon us.”

 

The Magnificent Seven still have a strong grip over the market. Their stocks led the tariff-induced selloff in April, and then helped lift the market all the way back during its march toward new highs. Those big names represent about 35% of the S&P 500, according to Dow Jones Market Data, and investors don’t expect that to change soon.

One major reason the seven were grouped together in the first place was that those seven companies were spearheading the AI push, Michael Hartnett, the Bank of America strategist who is credited with coining the term “Magnificent Seven” in 2023, has said.

But “right now, we’re seeing a pretty big divergence in the fundamentals,” said Ivana Delevska, founder and chief investment officer of Spear.

Apple, for instance, has failed to woo investors with its AI efforts. Last year, it introduced its Apple Intelligence service to great fanfare, only to come up short on its promises. The company has said it would share updates about its AI-powered Siri in the coming year, meaning it might not reach the market until late 2026.

Morgan, of Synovus, said he recently trimmed his Apple holdings for the first time in years. When a client was looking to make a donation, he recommended gifting Apple equities, something he wouldn’t have done years ago. Other investors have reduced Apple positions in favor of Nvidia or Microsoft.

“Apple is on a park bench eating an apple, watching the AI revolution go by on the highway,” said Dan Ives, managing director of Wedbush Securities and one of Wall Street’s biggest AI bulls.

 

Google’s parent company, Alphabet, faces antitrust scrutiny in the U.S. and Europe, along with mounting concern that AI chatbots such as ChatGPT will eat into Google’s dominant search business.

Some investors see plenty of upside potential. Google has a significant trove of user data available, something analysts say could help advance its AI models beyond competitors. Its AI overviews, which appear atop some search-results pages, are gaining traction, as are its Gemini AI tools.

“We believe that the perceived ‘missteps’ in AI with Google will correct and that Google will figure this all out,” wrote Jeff McClean, chief executive officer of Solidarity Wealth.

Tesla, a ticker long beloved by individual investors, has diverged from its Magnificent Seven counterparts for very different reasons, including flagging electric-vehicle sales and Elon Musk’s foray into politics. Musk has pushed to transform Tesla, down 18% this year, from an EV maker into a robotics and artificial-intelligence company. The CEO recently said Tesla shareholders would vote on investing in xAI, one of his other companies.

 

“In the Mag Seven, there’s the cool kids table—and Apple, Tesla and Alphabet, they’re by the kitchen at the bad table, wishing they were at the cool kids table,” Ives said.

The other half of the tech-stock group has continued to reap the rewards of AI optimism. The chip giant Nvidia has been the clearest winner in the AI race thus far. The world’s first $4 trillion company has split off from the Magnificent Seven more than any other. Its stock has more than tripled in the past two years.

 

Meta and Microsoft are well-positioned too, investors said. Amazon, whose shares are up 3% year to date, has been affected by tariffs and the uncertainty regarding them. The company has invested in the AI startup Anthropic.

Wall Street will be parsing second-quarter results for indications that these large tech companies are continuing to invest big in artificial intelligence. That is important given lofty valuations: Six of those seven companies recently traded at more than 25 times their expected earnings over the next year, compared with an S&P 500 average of 22.35. Alphabet was the only one below that bar.

“Earnings are going to have to be really spectacular to push these stocks significantly forward from here,” said Cox of Harris Financial. “I don’t know if that’s possible.”

In the second quarter, the Magnificent Seven are expecting 14% year-over-year net-income growth, significantly outpacing the 3% decline expected for the other 493 companies in the S&P index, according to a recent report from Morgan Stanley.

 

Given that all seven companies have strong exposure to AI, or enough capital to make acquisitions and catch up, it is possible this divergence is temporary, according to some investors.

“The Mag Seven friends could reunite at the party over the next year, but it all depends on how they navigate the AI revolution,” said Ives, the Wedbush managing director.

The previous era was defined by FAANG—Facebook’s parent, Meta; Amazon; Apple; Netflix; and Google’s owner, Alphabet—until that group fizzled in 2023. If these companies’ stocks continue heading in wildly different directions, that might leave the door open for a newly named group of hot stocks—and the Magnificent Seven could go the way of FAANG or the Nifty Fifty.

Some investors are already wondering about what moniker will be next.